As our attention expands to include thoughts of recovering economic conditions, here is a simple way to think about it. We need a simple way as discussions of stimulus, monetary easing, essential industries, quarantines etc. makes it seem too complex. In a way our move toward recover is as simple as this.
I need a haircut. I needed a haircut before mid-March and the stay at home requests. So, I really need a haircut.
My barber is closed, for obvious reasons. I have already reached out to get an appointment as soon as they reopen. When I called their answer was, “Yes sure, but there are a lot of other people wanting the same thing. We will get to you as soon as we can, because right now there is no money coming in, but we can only cut so much hair in a day.”
The demand for haircuts will be high. Much higher than my barber’s capacity to supply them. That’s a supply side economic shock. I could go to a different barber, but they do a really nice job.
The hair cut that I cannot get when I want is a missed opportunity – just because I want it does not mean it counts as growth. It will not count until I get the cut. The economy grows, but that growth is constrained by the ability of suppliers to meet customer demand.
I could try to outbid others who are getting a haircut, buy out their appointments. This raises the cost of a haircut. I am sure someone has already thought about how to scalp haircuts and beauty appointments the same way they scalp concert tickets. The pun is intended.
Outbidding others inflates the cost of a haircut. Inflates as in inflation, something the Gen Xers have no memory of. The hope is that inflation will be short lived as my barber works through the backlog, hires more stylists, expands hours etc. Otherwise the recover can lurch into a negative cycle where prices rise too fast, interest rates follow and now I pay more for a haircut.
The inability to get my haircut means that I stop looking for one. I wait which results in decreasing demand. That is a demand shock to the economy as people have money, but they are unwilling to spend, or they do not have the money given job losses and other priorities. Government stimulus should help correct that drop in demand.
The two do not resolve themselves until I get my haircut at a reasonable time and reasonable price. Do not when that will be. But I do know that cutting my hair has never been more important to the economy, much less my personal appearance.
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